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Intermarket:
- SP Futures 3906 (+0.08%)
- EUSTXX 3693 (-0.05%)
- Crude Oil 58.35 (-0.55%)
- US 10YR 1.13 (-2.07%)
- EurUsd 1.2128 (+0.09%)
- UsdJpy 104.58 (-0.01%)
- DAX 13921 (+0.02%)
Risk appetite softened on Wednesday as profit-taking on long stock, cryptocurrencies and other reflation trades kicked in after a sharp fall in TSLA. Alongside the evident reduction in volatility, market participants may be exhibiting more prudence. Markets in Asia were dull as China and Japan are closed for local holidays.
The decline in risk appetite helped to offset USD weakness from lower yields, while expectations that Congress will produce another hefty stimulus package and U.S. progress in taming the growth in COVID-19 cases provided a supportive backdrop.
Fed Chair Jerome Powell reiterated that the Fed will alter the direction of monetary policy until the U.S. reaches maximum employment and substantial further progress is made toward its inflation goals. However, Powell’s dovish stance is old news, and the market failed to react.
Looking ahead: vaccine efficacy and production capacity remains top of mind in Europe, while US jobless claims will be eyed during the NorAm session.
Matters that Matter:
• Markets quiet with China, Japan on Holiday.
• Dovish rhetoric from Powell: will not tighten policy solely in response to a strong labour market.
• Biden says “will work with China when it benefits American people”. Tensions still rather high.
• Yellen warns of risks from misuse of cryptocurrencies – looks for updates to AML Act.
• BOE’s Bailey rejects Cryptocurrencies as payment method.
• Mastercard to start supporting select Cryptocurrencies on their network.
• BNZ says risks are to the upside for Kiwi.
• Australian Treasury official says economy recovering faster than expected (and vaccinations will provide an acceleration).
Majors 1-Day View:
USDJPY
- Prices the 3rd lower daily high & low in a row on Wednesday and a failed rally maintains the bias to the downside. However, a little changed close also suggests caution and as such we suggest selling into rallies today.
- US yields softer but haven demand supports USD still.
- Powell still dovish.
EURUSD
• Prices posted the 3rd higher daily high & low in a row yesterday, but sellers have returned ahead of last week’s top with prices closing the day little changed. The topside rejection suggests caution and we prefer to remain neutral in between 1.2146/1.2080.
• Expectations of US fiscal package helping risk assets and weighing on USD.
AUDUSD
• Prices posted the 4th higher daily high and low yesterday but gains were limited and prices closed the day in negative territory. This suggests caution and we prefer to remain neutral in between .7758/.7690.
• USD weakness, strong commodities supportive; slight weakness in equities dampening risk appetite.
GBPUSD
• Despite the continued overbought signals, prices posted the 4th higher daily high & low in a row on Wednesday reaching fresh 2 ½ year highs. However, sellers returned into the close, dampening bullish signals. As such, we suggest remaining neutral in between 1.3870/1.3790 today.
• Range top broken on USD weakness.
• Significant option defence reported ahead of 1.4000 Barriers.
FX Relative ATR Grid
Comment: Volatility remains largely compressed in FX and yesterday there was a volatility contraction in the USD. For now caution is advised, but we are also awaiting the upcoming volatility expansion.
Relative Strength Grid
Comment: Current trending indications remain GBP strength, CHF weakness, EUR weakness. Strongest 1-day momentum signals were NZD (weakness), JPY (weakness) vs. CHF (strength) and GBP (strength).